The Wall Street Journal

By Dan S. Barnabic, October 09, 2015

In the wake of market recovery from the last real estate crash of 2007/08, developers have been once again trying to lure low-earning Americans into buying homes and condos facilitated by very small (in some cases 3%) down payments, with the idea to increase domestic demand.

The danger of foreign buyers gobbling up American homes

By Dan S. Barnabic

Market Watch

But this scheme seems not to be working so well anymore. Domestic wherewithal and therefore demand for purchasing real estate seems to be waning. Realty company Zillow Group reported recently that 30% of homes lost value over the last year. This is in concert with another recent report about a falling bear market in lumber and the latest Google Consumer Survey showing approximately 62% of Americans having less than $1,000 in their savings accounts.

However, in stark contrast, demand for homes in select urban areas such as San Francisco, Denver, Portland, Seattle, Los Angeles, Las Vegas and Miami — where prices appreciated from 6.1% to 10.4% within the year — is an oddity that needs explaining. Unusual high appreciation of the aforementioned urban centers is due to the ever growing influx of foreign buyers — mostly wealthy Chinese — who view American residential real estate as the safest investment commodity.

According to a National Realtors Association survey, the Chinese spent $22 billion on U.S. housing in 12 months through March 2014 — 72% more than they spent the year before! They buy mostly high-end, expensive homes with a median price of over half a million dollars. Chinese foreign buyers account for almost half of all the sales to other foreign buyers such as Canadians, British, Indians and Mexicans.

At first glance, foreign investment may seem to be a welcome boost to the economy. But a very disturbing second thought comes to mind — rapid depletion of affordable housing for middle-class Americans. Notwithstanding its present economic woes, China produces legions of multi-millionaires who, almost as a rule, prefer to invest their money in residential properties outside of their country — mostly in the U.S., Canada and Australia.

Even at their economy’s reduced annual growth rate of 5% or 6 percent, given their enormous population of 1.4 billion, a large number of wealthy individuals will continue to emerge from China and continue to buy into American residential properties for years to come. The same can be said for emerging wealthy buyers from India, whose population is close to 1.3 billion.

By allowing foreign buyers to buy American homes in large numbers, affordability of housing for American middle-class citizens is only going to further erode, eventually to the point of them not being able to afford homes in their own country.

Some would argue that foreign buying of American homes cannot do much harm as foreigners cannot take the brick and mortar back to their own countries. While this holds true insofar as foreigners buying commercial real estate and investing in other types of commercial enterprises, buying too many residential homes will soon put them in a position to dictate American home and rental prices, notwithstanding periodic real estate corrections. If the situation remains unchecked, residential prices will keep on soaring and eventually the trend will spread to other cities, due to foreign demand.

Even worse may happen when the next market correction occurs. As properties lose their values, there may likely be a much stronger, secondary wave of foreign demand that could snap up American homes at an even faster pace, creating a very serious problem of affordability for middle-class Americans. The only way to truly remedy this potential threat is to either severely restrict or otherwise exclude foreigners from buying American homes. This would pave the way for domestic supply and demand to become an exclusively American issue, where the prices of residential properties would adjust in line with American citizens’ affordability factors.

While encouraging foreign buyers to invest in the U.S. economy is of vital importance to the country, allowing them to buy residential real estate and/or farms in large numbers may turn into a disaster. The unchecked and rampant buying of American residential properties by foreigners is indeed a sword that cuts both ways. On one hand, the country temporarily benefits by the influx of foreign capital. On the other, middle-class American buyers end up unable to keep the pace with ever increasing prices.

I strongly believe that in the absence of foreign buying, the construction industry would still continue to be viable as older homes, apartments and condominiums need constant upgrades. The industry would also continue to cater to new housing start-ups, this time encouraged by Americans who can afford them, albeit at less expensive price tags. The only difference would result in developers making less profits along the way.

If the American government doesn’t take serious, pro-active measures to ensure that the cost of sheltering for Americans becomes an exclusively domestic affair, there is a good possibility where, in a not so distant future, foreigners may become major landlords of U.S. homes, dictating their prices and rentals. Effectively, they’ll be in position to hold Americans at ransom in their own country.